L.A. is golden indeed

Between them, Los Angeles and Orange counties had a population of 12.24 million in 1998. That figure represents more than one-third of the total California population of 33.15 million and is larger than the population of the majority of states. Projectionsshow the two-county total rising to 12.45 million by the end of 2000, an increase of about 1.7%. Over the next decade, Los Angeles County's population is projected to increase by 1 million people and Orange County by about 250,000, according to the California Department of Commerce.

Job growth has outpaced population growth, bringing unemployment down to near record low levels. According to the Los Angeles County Development Corporation, Los Angeles County added 84,300 jobs last year, a 2.1% increase, while Orange County posted even stronger employment growth, adding 61,000 jobs for a remarkable 3.5% increase. The agency projects smaller increases in 1999, with Los Angeles adding 75,000 jobs and Orange County only 45,000.

According to the Seeley Co./Colliers International in Los Angeles, high-paying jobs - particularly in engineering, high technology, consulting, entertainment and construction - have shown the greatest growth.

Gaining entitlements is a growing development snag throughout California. According to Patrick Donahue, executive vice president of Donahue Schriber, a Newport Beach-based retail developer, communities in Los Angeles and Orange counties have become particularly adamant about maintaining careful planning and design.

"There's a substantial increase in community activism," says Donahue. "It's becoming very difficult to get approvals. Local residents understand they can flex their muscles."

Though many developers, particularly from outside the state, chafe at the constraints, Donahue considers them an asset because they insure that a property, once developed, will maintain value. In fact, he says, his company focuses on building in communities with strong planning laws.

"Communities have created barriers to entry, but once you're in, you have less to worry about encroachments from competition. You also know the demographics are going to remain positive," he says.

Office markets The Los Angeles office market has been slow to recover from the recession. Vacancies have dropped, but less sharply than in most other areas. Seeley points out that office employment grew 3.3% annually from 1996-1998, but the amount of occupied space grew only 2% annually. Historically, the firm says, the comparatively high employment growth rate would lead to substantially greater absorption.

The discrepancy is due to a shift in geographical emphasis, resulting in low vacancies and new construction in certain submarkets and continuing high vacancies in others. "Downtown L.A. is still a little bit soft in terms of its vacancies because of bank consolidations and oil companies leaving the market," says Gary Toeller, senior vice president in the Los Angeles office of Koll Development. "Since the overbuilding of the late-'80s, it hasn't completely absorbed the leftover space."

Meanwhile, multimedia companies serving the entertainment industry have generated substantial new development in West L.A., Century City, Santa Monica, Venice and Marina Del Rey - the parts of the city most attractive to the younger professionals who populate multimedia companies. Toeller rates the market the strongest in the metropolitan area.

He also lists the Burbank, Glendale and Pasadena markets as strong, with Pasadena the strongest, having become the insurance, mortgage and financial center for San Gabriel Valley.

Toeller reports Koll Development has two large office projects set for Pasadena, a 176,000 sq. ft. building on East Colorado Boulevard that begins construction in October and a 200,000 sq. ft. building on Lake Street that will start later. Also, the developer recently completed a $2.5 million rehab of a four-story, Class-A office building in Century City and is soon to embark on a new office and retail project on a 40,000 sq. ft. parcel in downtown Santa Monica.

According to CB Richard Ellis (CBRE), vacancies for the entire market dropped from 13% to 11% between second-quarter 1998 and second-quarter 1999, with average rents climbing slightly to $1.78 per sq. ft. According to Seeley Co., West L.A. had the lowest vacancy level at 6.9% and downtown L.A. the highest at 18%. The brokerage adds that West L.A. also had the highest rents at $2.51 a sq. ft. and the San Gabriel Valley (excluding Pasadena) the lowest at $1.59 a sq. ft. However, Toeller reports Koll's Century City building is 50% leased at rents of almost $3 a sq. ft. He anticipates getting $3.25 a sq. ft. in Santa Monica.

Generally, says Toeller, the market overall seems in balance with current vacancy levels maintained even as new product comes online. According to CB, the market saw negative or minimal net absorption from July 1998 to March 1999, but activity picked up in the second quarter to reach 1.27 million sq. ft. on an inventory of about 170 million sq. ft.

Seeley forecasts continued balance moving forward. Toeller agrees, noting little undeveloped land is available and the entitlement process is long and cumbersome. "Somebody who buys property today has to be very patient and have the resources to wait out a 12- to 18-month entitlement process," he says.

With only 50 million sq. ft., according to CBRE, Orange County's office market is considerably smaller and less vibrant than its neighbor's. Low net absorption drove up vacancies half a point to 10.19% in second-quarter 1999. Despite the low absorption, Northbrook, Ill.-based Grubb & Ellis reports rents rose nearly 25% last year, with the county average breaking $2 a sq. ft. for the first time ever. The airport area records the highest rents, $2.57 a sq. ft. for Class-A. Class-A rents in the south county area average $2.31 a sq. ft., while the central, west and north county markets range between $1.50 and $1.60 a sq. ft.

CBRE attributes the low absorption to high-tech and multimedia tenants migrating to non-traditional office space such as flex buildings. It says this space is often not tracked. Consequently, its leasing does not get factored in to market calculations. CBRE estimates the market would show significantly stronger numbers if all this space were included.

In addition, according to a report by Delta Associates of Long Beach, consolidations by just two major tenants - Unocal and the Federal Deposit Insurance Corp. - resulted in 360,000 sq. ft. returning to market.

According to CBRE, approximately 2.5 million sq. ft. of office space was in construction in June, but nearly half the space was preleased.

The September completion of Phoenix-based Opus West Corp.'s 267,000 sq. ft. Opus Center Irvine and Koll's 171,000 sq. ft. Koll Center Irvine North mark the first speculative office buildings to open in the county in a decade. GE Investments has a 128,000 sq. ft. spec project set to open in early 2000, and Koll, which reports 80% leasing for Irvine North, has two additional spec projects set for Irvine, a 187,000 sq. ft. project to open in September 2000 and a mixed-use complex with 250,000 sq. ft. of office space, which goes into construction in January.

In terms of sales, Toeller figures cap rates in Los Angeles have climbed about half a point due to REITs leaving the market. "You're looking at 9 caps in most buildings, though in a few areas it could go down to 8.5," he says. Los Angeles-based Voit Commercial Brokerage pegs Orange County cap rates in the same range.

Industrial market Despite a big decline in aerospace jobs, Los Angeles County remains a major industrial center. According to LAEDC chief economist Jack Kyser, the county has over 1 million manufacturing jobs, the largest concentration in the nation.

"Everyone thinks our manufacturing jobs went away due to aerospace industry downsizing," he says. "In fact, the Los Angeles metropolitan area ranked number one nationally in manufacturing jobs in 1998."

According to Seeley Co., the county has approximately 661 million sq. ft. of industrial space and a vacancy rate of 4.6%. Absorption leads growth by a small amount: the brokerage reports 10.14 million sq. ft. of absorption in the first half of the year and 9.58 million sq. ft. in construction. For all of 1998, the market absorbed only 5.6 million sq. ft.

The brokerage says average monthly rents range from $0.58 a sq. ft. in the San Fernando Valley to $0.39 in the San Gabriel Valley, with an overall average of $0.44 a sq. ft. In a few smaller pockets such as West Los Angeles rents can hit $1 per sq. ft. and higher, but the spaces tend to be small, highly specialized or service-oriented.

Seeley posts average sales prices at $56 a sq. ft., ranging from $49 a sq. ft. in the South Bay to $67 a sq. ft. in the San Fernando Valley. Again, in West L.A. and the beach cities prices can go much higher, topping $100 per sq. ft.

LAEDC warns that increasing traffic problems and housing prices may drive industrial users to other places. Distribution companies have already begun to leave because of time lost to traffic tie-ups. Meanwhile, industrial users of all types are finding it difficult to pay line employees enough for them to live in the county.

The county benefits greatly from its port activities. The adjoining ports of Los Angeles and Long Beach form the largest commercial shipping center in the nation. Long Beach ranks as the largest container cargo center; Los Angeles ranks second.

Both ports are growing. The 7,500-acre Port of Los Angeles, which hosted 2,569 vessels last year, is in the midst of a $180 million expansion. Long Beach saw a 20% increase in its inbound container business and an 8.3% increase in outbound from May 1997 to May 1998.

Orange County has a much smaller industrial market - about 200 million sq. ft., according to Tom Rogerson, a broker in Seeley's Irvine office. Rogerson says most traditional manufacturing is located in the county's northern half around Anaheim and Santa Ana.

The southern part of the county, on the other hand, has become a high-tech center for making computer chips and assembling small electronics products. Most of the growth, Rogerson adds, is in this region. "The area has about 8% of the county's industrial land, but 20 to 25% of construction is occurring there," he says.

Availability of land is the primary reason. Much of the south county is part of the original Irvine Ranch and controlled by the Irvine Co., which has been very careful about opening land for development. Typically it sells land only as part of large master-planned sites and only opens those sites to development as existing ones fill. (This holds for all development categories, not just industrial.)

Rob Socci, senior vice president in the Anaheim office of the Voit Cos., says the market is stable from an investment perspective. "There's not the frenzied pace of 1997 and the first half of 1998 when you could sell a property no matter what it was. You could get 10 bids on if it was leased," he says.

Class-A properties are particularly in demand, he adds. "Class-A properties with credit tenants trade at 8.25 to 9 cap rates, while Class-B and -C properties trade from 9.25 into the 10s," he says. Socci terms the Anaheim-North Orange County and Orange County Airport areas and the Irvine Co.'s Irvine Spectrum the most sought after. According to Rogerson, R&D is the dominant use at the Spectrum, with R&D space renting for about $0.75 per sq. ft. He calculates R&D land prices at $18 per sq. ft., up from $16 per sq. ft. two years ago.

Retail trends shift Several significant retail trends are changing the face of Southern California retail. Prime among them is the growing emphasis on careful planning and design, with the shift to Main Street-type developments being especially dramatic.

Virtually every new project is designed to encourage public gathering and walking. Even if people drive to a shopping center, they want to enjoy walking around it once they arrive. Fully enclosed malls have become a rarity, with a number of existing ones redesigned to introduce outdoor courtyards or sidewalks.

Entertainment retail, while common across the nation, is truly big in the entertainment capital itself. Hollywood alone has three large entertainment projects under construction: the 640,000 sq. ft. Hollywood & Highland by San Diego-based TrizecHahn Centers; 200,000 sq. ft. Hollywood Marketplace by Regent Properties of Beverly Hills; and 245,000 sq. ft. Cinerama Dome Entertainment Center by Pacific Theatres Realty Corp. of Los Angeles. The projects are intended to revive Hollywood as a tourist destination. o

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